Among recent enforcement actions were charges by the Securities and Exchange Commission against a number of lawyers the agency said offered EB-5 investments without being registered to act as brokers.
In addition, the Financial Industry Regulatory Authority censured UBS Financial Services and fined the firm $750,000 for supervisory failures related to short positions in tax-exempt municipal bonds that arose out of trading failures, and censured and fined Wells Fargo Advisors on unsuitable recommendations of structured repackaged asset-backed trust securities.
SEC Charges Lawyers on EB-5 Investments
The SEC has charged a number of lawyers around the country that it said offered investments without being registered to act as brokers.
The EB-5 program provides a path to U.S. residency for foreigners if they invest in a specific project that creates or preserves at least 10 jobs for U.S. workers. According to the agency, in one case, immigration attorney Hui Feng and the Law Offices of Feng & Associates not only acted as unregistered brokers by selling EB-5 investments to more than 100 investors, but they also defrauded clients by failing to disclose they received commissions on the investments in breach of their fiduciary and legal duties. They also defrauded some entities offering the EB-5 investments.
In settled administrative proceedings against other lawyers and firms for broker registration violations, the agency said that various EB-5 regional centers or their managers paid commissions to the attorney or law firm for each new investor they successfully sold limited partnership interests, in payments that were separate from legal fees received to provide legal services to the same clients.
The lawyers and firms then took part in activities necessary to achieve the transactions, such as recommending one or more EB-5 investments, acting as a liaison between the regional center and the investor or facilitating the transfer or documentation of investment funds to the regional center.
While the complaint against Feng and his firm seeks disgorgement, prejudgment interest and penalties along with permanent injunctions, charges against the other lawyers and firms have been settled, without admission or denial of the SEC’s findings.
The following individuals and firms agreed to cease and desist from acting as unregistered brokers: Austin, Texas-based Mehron Azarmehr and Azarmehr Law Group, who agreed to pay disgorgement of $30,000, prejudgment interest of $2,965 and a penalty of $25,000; Miami-based Michael Bander and Bander Law Firm, who agreed to pay disgorgement of $228,750, prejudgment interest of $19,434 and a penalty of $25,000; Miami-based attorney Roger Bernstein, who agreed to pay disgorgement of $132,500, and prejudgment interest of $8,243; Hoboken, New Jersey-based attorney Allen Kaye; Los Angeles-based attorney Taraneh Khorrami, who agreed to pay disgorgement of $60,000, prejudgment interest of $7,843, and a penalty of $25,000; Los Angeles-based Mike Manesh and Manesh & Mizrahi, who agreed to pay disgorgement of $85,000 and prejudgment interest of $11,159; and China-based resident Kefei Wang, who agreed to pay disgorgement of $40,000, prejudgment interest of $1,590, and a penalty of $25,000.
Muni Bond Supervisory Failures Get UBS Financial Services a FINRA Censure, Fine
FINRA censured UBS Financial Services and fined the firm $750,000 after it found that from July 2009 through December 2013, the firm’s supervisory measures, including written supervisory procedures, failed to address short positions in tax-exempt municipal bonds that resulted primarily from trading errors at the firm’s retail branches.
According to the agency, as a result of these supervisory failures, the firm inaccurately represented to approximately 4,371 customers that approximately $1,174,000 in interest that the firm paid to those customers was exempt from taxation. However, the firm did not hold the bonds on the customers’ behalf, and the firm paid the interest that the customers received and therefore was taxable as ordinary income. As a result, at least $282,261 in federal income taxes were not paid.
The firm did not consider, and the automated system calculating the interest owed to customers did not take into account, whether the interest it paid to customers should be coded as nontaxable when the firm, rather than the municipal issuer, paid the interest.
FINRA also found that the firm did not provide adequate guidance or oversight on how and when municipal short positions should be covered. Beginning in 2012, the firm recognized that short positions were not being covered in a timely fashion and worked on reducing the number of short positions. But during the relevant period, it sometimes took a month or more for the firm to cover municipal short positions; some of those positions took more than a year to cover. The firm also failed to let customers know they were not receiving tax-exempt interest when the firm was short municipal securities. As a result, the firm sent inaccurate Forms 1099 to customers who received firm-paid interest for calendar years 2009 through 2012, and also sent inaccurate account statements to some customers during the review period that incorrectly classified firm-paid interest as tax-exempt when it should have been classified as taxable.
Because the firm didn’t identify particular customer accounts offsetting its short municipal bond positions in its records, holding them instead in aggregate, it couldn’t accurately report taxable income to its customers who were receiving firm-paid interest as taxable income.
The firm neither admitted nor denied the findings but consented to the sanctions.
Wells Fargo Advisors Censured, Fined on Unsuitable Recommendations
Wells Fargo Advisors was censured by FINRA and fined $500,000, as well as being ordered to pay $241,974.34, plus prejudgment interest, in restitution to customers, for selling them complex products even its brokers didn’t understand.
According to the agency, the firm made unsuitable recommendations to retail customers to purchase structured repackaged asset-backed trust securities (STRATS), a complex structured product that paid a floating rate of periodic income up to a minimum or maximum rate, based on the STRATS trust’s interest in a capital security issued by a financial institution and the STRATS trust’s interest in an interest rate swap contract.
FINRA said that, while the firm sold approximately $12 million worth of STRATS to its retail customers, in both the primary and secondary markets, its sales-force training on structured products contained no specifics on the unique features and risks of STRATS. Also, its intranet page dedicated to fixed income products provided basic information on STRATS, but not any information about the investing risks they presented, or specifically about the risks to customer principal in the event of a redemption of the underlying capital security.
Many customers holding STRATS received less, and in some cases significantly less, than the amount they paid for the STRATS when the underlying security was redeemed and the STRATS terminated, because of the terms of the underlying swap agreement. The firm’s registered representatives did not understand the risks STRATS presented, and did not have a reasonable basis to recommend them to the firm’s retail customers. Neither educational materials nor supervisory procedures were designed to prevent such unsuitable recommendations.
Without admitting or denying the findings, the firm consented to the sanctions.
— Check out SEC Investor Advocate Wants Elder Fraud Rule for RIAs on ThinkAdvisor.